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4. Show and describe what happens in a LARGE OPEN ECONOMY to consumption (C), real interest rates (r), domestic investment (I
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Answer #1

Aggregate Demand = Consumption + Investment +Government Spending + Exports - imports

If Government Spending falls, then aggregate demand falls. When demand falls, price as well as consumption of goods fall. Date duontity ged

When demand falls, IS curve also shifts to its left while LM curve remains the same.

— 9 9 a X - - - - - ? W fate Interest F1As interest rate have fallen from i to i1 level, investment level would rise because interest rate and investment level have inverse relationship with each other. Savings would rise as more investment level would give more savings in long run. Net exports would not change in short run but rise in long run as investment made today would take time to flourish. More trade would raise the capital flow among nations. Real exchange rate would rise as the domestic currency will appreciate against other currency.

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